By Wes Goodman Dec. 3 (Bloomberg) -- Treasuries fell as U.S. efforts to combat a deepening recession buoyed stocks around the world, eroding demand for government debt with yields at record lows. Government securities declined for the first time in more than a week as two-year notes yielded less than the Federal Reserve’s target for overnight bank lending and three-month bill rates were 0.05 percent. Asian high-yield, high-risk corporate bonds rose, indicating waning demand for sovereign debt. “We’re not going to buy at these levels,” said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, who helps invest $2.8 billion. “At some point there’s going to be a ray of hope for the economy. Fear will go away and all the support for Treasuries will evaporate.” Fovinci sold last month. The yield on the benchmark two-year note rose four basis points to 0.94 percent as of 3:11 p.m. in Tokyo, according to BGCantor Market Data. The price of the 1.25 percent security due November 2010 fell 2/32, or 63 cents per $1,000 face amount, to 100 19/32. A basis point is 0.01 percentage point. The figure is six basis points less that the Fed’s target rate. Over the past six months, the yield has averaged 33 basis points more than the central bank rate, according to data compiled by Bloomberg. Rates on two-year notes fell to 0.85 percent on Dec. 1, the least since Fed records tracking the figure began in 1976. Ten- year yields rose one basis point to 2.71 percent. MSCI’s Asia Pacific Index of regional shares gained 1.2 percent, the first advance this week, following rallies in U.S. and European shares yesterday. Junk Bonds Yields on Asian dollar-denominated junk bonds fell from a record relative to benchmark rates, according to Merrill Lynch & Co. index data. The spread on Merrill’s Asian Dollar Non-Financials index narrowed four basis points to 26.73 percentage points more than Treasuries yesterday. The bonds are rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s. The Fed yesterday extended the term of three emergency-loan programs to April 30 from Jan. 30. Congress is considering making loans to General Motors Corp., the maker of Chevrolets and Hummers, and other automakers. The government has arranged a $700 billion plan to rescue banks and an $800 billion program to unfreeze credit for homebuyers and small businesses. Yields fell to records earlier in the week after Fed Chairman Ben S. Bernanke said on Dec. 1 that the central bank may purchase Treasuries to keep borrowing costs down. Raised Bets Traders increased bets that Bernanke and his colleagues will cut interest rates at their next meeting Dec. 16 by at least a half percentage point to 0.5 percent. “The Fed may be able to keep yields from rising,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank. “We can’t find anything good about the economy in the economic indicators.” The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, was 42 in November, the lowest level since records began in 1997, according to the median forecast in a Bloomberg News survey before the report today. Readings below 50 indicate a contraction. Futures on the Chicago Board of Trade showed 38 percent odds the Fed will lower its 1 percent target for overnight bank lending by 75 basis points on Dec. 16 as of late yesterday in New York, rising from 26 percent the day before. The rest of the bets are for a half-point cut. Mortgage Debt Investors also sought long-term U.S. securities this week after the Fed said Nov. 21 it will buy as much as $600 billion of mortgage debt, fueling demand for Treasuries to replace bonds backed by home loans that may be repaid early. Investors in November pushed returns to 5.4 percent, a Merrill index shows. U.S. government debt surged 11.6 percent this year, the most since 2000. President-elect Barack Obama, who assumes power in January, will take control of an economy that entered a recession a year ago, according to the National Bureau of Economic Research, the panel that dates American business cycles. In Japan, 30-year government bonds gained on speculation inflation will cool around the world. The yield on the 2.4 percent note due in September 2038 fell 3 basis points to 2.17 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. U.S. rates indicate the recession sent inflation forecasts tumbling in 2008. TIPS The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was 41 basis points. The spread narrowed from this year’s high of 2.68 percentage points in March. Money-market rates suggest banks are reluctant to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 2.16 percentage points from this year’s low of 76 basis points in May. The spread reached 4.64 percentage points on Oct. 10, the most since Bloomberg began tracking the figure in 1984. The cost of protecting Asian bonds from default declined after the Fed extended its loan programs, indicating demand for higher-yielding assets may increase. The Markit iTraxx Asia credit-default swap index of 50 investment-grade borrowers outside Japan fell 20 basis points to 4.05 percentage points, according to Barclays Plc. Credit- default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements.

Source